New programs ease student debt burden, a little

The U.S. Department of Education today announced two changes to its student loan program designed to ease debt burdens for some borrowers, but if you dig into the details, it won’t be the kind of relief occupiers of Wall Street and elsewhere are demanding.

One change will reduce interest rates very slightly for borrowers who are already in repayment and have two types of federally backed loans and consolidate them. The other could reduce debt payments for some borrowers who are in school today and have heavy debt loads relative to their incomes after they graduate.

An important point: The changes apply only to federally guaranteed loans. These include Stafford, Plus and Perkins loans, although not all of these loan types will qualify for all of the new benefits.

Until July 2010, these guaranteed loans were issued two ways: by the education department itself under the direct loan program and by banks and other private-sector lenders who participated in the Federal Family Education Loan or FFEL program. The FFEL program ended in July 2010 and since then all new federal loans are direct loans.

None of the changes announced today apply to private loans issued by banks and other lenders that are not government guaranteed.

So who will benefit, potentially?

–If you are making payments on both direct loans and FFEL loans and consolidate them into a direct consolidation loan next year, the government will cut your interest rate on the FFEL loans only by 0.25 percentage point. You can get an additional 0.25 percent discount on all your loans if you sign up for automatic payments, although this rate cut is available for all borrowers in the direct loan program (and many in FFEL loans) who sign up for electronic billing and auto pay, says Mark Kantrowitz, publisher of Finaid.com.

The Obama administration says consolidating these loans will save the government money on servicing costs and will cut down on defaults if borrowers have only one monthly payment to make instead of two or more. It says about 6 million borrowers have at least one direct and one FFEL loan.

If you have only FFEL or only direct loans, you can’t get the consolidation rate cut, although you can still consolidate your loans to simplify repayment.

–Students in school today could qualify for the other new program, which the Obama administration has dubbed Pay as You Earn. This is essentially an enhanced version of an existing program known as Income Based Repayment, which is available today.

IBR helps borrowers who owe a lot relative to their income. In general, borrowers could qualify if their student loans exceed what they make in a year, although borrowers with smaller debt loads might qualify if they have a family, said Lauren Asher, president of the Institute for College Access & Success.

Under IBR, student loan payments are capped at 15 percent of a figure known as discretionary income. Any remaining debt is forgiven after the borrower has made payments under IBR for 25 years (which do not have to be consecutive) or after 10 years if the borrower works in a public-service or non-profit job.

Under a law passed last year, borrowers who take out their first loan in July 2014 or later and enter IBR will have their payments capped at 10 percent of discretionary income instead of 15 percent and any remaining debt forgiven after 20 years instead of 25 (for private-sector jobs). Those enhancements won’t be available to today’s students or people who have already graduated.

Pay as You Earn essentially accelerates the start date of the 2014 changes to help students who are in school today after they graduate. To qualify, you must have taken out your first federal student loan in 2008 or later and take out at least one more student loan in 2012 or later.

Justin Hamilton, a spokesman for the education department, said Pay as You Earn is mainly designed to help “students who entered college at the height of the financial crisis.” But it won’t help students who graduated during the financial crisis or before.

The administration estimates that 1.6 million student borrowers could one day benefit from Pay as You Earn. It says the two new programs combined won’t cost taxpayers money because savings from the loan consolidation program will offset the interest rate reductions and loan forgiveness. The programs do not need Congressional approval.

By and large, the demonstrators on Wall Street and elsewhere who are demanding student loan relief won’t benefit much from these new programs, Kantrowitz said.

Many could benefit from the existing IBR program, if they knew about it. Kantrowitz estimates that only 1.25 percent of current borrowers are taking advantage of IBR, in part because it has not been well publicized.

In its announcement today, the administration said it is “taking steps to make it easier to participate in IBR and continues to reach out to borrowers to let them know about the program.